TDS on Salary in Nepal: How to Calculate It Correctly
TDS on salary in Nepal is calculated on annual projected income, not on each month in isolation. You estimate the employee's total income for the fiscal year, apply the slab rates, subtract allowable deductions, then divide the resulting annual tax across the remaining months. Getting this wrong is the most common payroll compliance failure in Nepali SMEs.
What counts as taxable salary income
Taxable income is not just basic salary. It includes:
- Basic salary
- Allowances such as dearness and travel allowances paid in cash
- Bonus and incentive payments
- The taxable value of benefits in kind
- Overtime payments
Employer contributions to an approved retirement fund are treated separately, and the employee's own contribution is deductible within statutory limits.
How the slab structure works
Nepal uses a progressive slab system with different thresholds for individual and couple filing status. The first slab is taxed at the social security tax rate of 1 percent, which functions as a contribution rather than ordinary income tax. Rates step up through the higher bands.
Two things trip people up:
- Individual vs couple status changes the thresholds. Filing status must be captured per employee, never assumed.
- The 1 percent social security tax does not apply where the employee already contributes to an approved retirement fund such as SSF, in the manner prescribed. Applying it anyway silently overtaxes your staff.
Deductions you can legitimately apply
- Employee contribution to an approved retirement fund, subject to the statutory ceiling
- Approved life and health insurance premiums, up to prescribed limits
- Remote-area allowance where applicable
- Donations to approved organisations, within limits
The projection method, step by step
- Project the employee's total annual taxable income from their current contract.
- Subtract allowable deductions to reach assessable income.
- Apply the slab rates to get the annual tax liability.
- Subtract TDS already deducted in earlier months of the fiscal year.
- Divide the remainder by the number of months left in the year. That is this month's TDS.
Doing this month by month with no projection is where errors compound. An employee who gets a mid-year raise, a bonus, or files a new insurance declaration needs the whole projection recomputed, not a patch applied to a single month.
Three mistakes that cause reassessment
1. Treating each month independently
An employee paid a large Ashadh bonus gets massively overtaxed that month and undertaxed for the rest of the year if you do not reproject the annual liability.
2. Forgetting mid-year joiners
Someone joining in Poush has a part-year income. Taxing them on a full-year projection deducts far too much and creates a refund position at year end.
3. Ignoring declaration changes
Insurance premiums and retirement contributions declared mid-year change the annual liability for the entire year, retroactively. The projection has to be rerun, not adjusted forward.
How EK ERP handles it
EK ERP recomputes the full annual projection on every payroll run and adjusts the remaining months automatically, so a bonus or a mid-year change corrects itself without manual recalculation. TDS sheets are generated per employee, per fiscal year, ready for filing.
Disclaimer: This article explains the general calculation method. Slab thresholds and rates are set by the annual Finance Act and change year to year. Confirm current-year figures against the Inland Revenue Department before filing.